Wages and Floors

A writer for The Baltimore Sun recently said that, “A ‘new living wage’ will make Baltimore City no more livable than stilettos will make Sen. Barbara Mikulski a forward for the WNBA.” Meanwhile, in New York City, Mayor Bloomberg was said to have “scoffed” at a similar idea. These opponents of “living wage” legislation believe businesses will flee and unemployment will climb because of a mandated higher wage.

On the other side, proponents say that workers deserve a fair wage. Laborers should be able to afford to live in the city in which they work. In New York, supporters of a $10.00 living wage say that the current $7.25 state minimum is inadequate.

The “living wage” is a municipally mandated minimum for all subsidized jobs. For example, any business receiving a tax break, which could include most retailers, would have to observe the pay minimum. Living wage mandates tend to cluster between $10 and $11 an hour. Close to 140 municipalities, including Los Angeles, CA and Santa Fe, NM have living wage laws. Each time one is proposed, the same dilemmas resurface. The graph described below conveys the basic dilemma.

The Economic Lesson

Please imagine for a moment a supply and demand graph. Price is the y-axis and quantity is the x-axis.

Government, however, can say that it believes the market determined wage is too low. It then mandates a higher wage that can be depicted as a horizontal line placed above equilibrium. Economists call this horizontal line a “floor” because it stops wages from moving lower to their natural marketprice.

And therein lies the dilemma. A higher wage or more jobs? Floors create surpluses. At the new, higher wage, the number of jobs laborers want is more than the number of jobs businesses are willing and able to offer. So, we have a higher wage but fewer jobs.

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Elaine Schwartz has spent her career sharing the interesting side of economics. At the Kent Place School in Summit, NJ, she has been honored through an Endowed Chair in Economics and the History Department chairmanship. At the same time, she developed curricula and wrote several books including Understanding Our Economy (originally published by Addison Wesley as Economics Our American Economy) and Econ 101 ½ (Avon Books/Harper Collins). Elaine has also written in the Encyclopedia of New Jersey (Rutgers University Press) and was a featured teacher in the Annenberg/CPB video project “The Economics Classroom.” Beyond the classroom, she has presented Econ 101 ½ talks and led
workshops for the Foundation for Teaching Economics, the National Council on Economic Education and for the Concord Coalition.